Which of the following situations is an example of country risk?
A) Fiesta Corp. is an automobile manufacturer based in the U.S. The company’s negotiation attempts with China to open a manufacturing factory in Beijing failed owing to cultural differences.
B) Frostees Inc. is a food and beverages company based in the U.S. Its attempt to set up an outlet in Thailand failed primarily owing to a misinterpretation of the memorandum of understanding by a potential business partner in Thailand.
C) Alpha Corp., a rice manufacturer based in Pakistan, suffered losses when the U.S. Department of Commerce decided to impose tariffs on the import of paddy rice to avoid competition for the domestic industry.
D) Tamiaz LLC is a U.S. based manufacturer of clothing with outlets in China, Vietnam, and India. The company incurred a loss due to delayed payments from India owing to fluctuations in the currency exchange rates.
A country risk is a set of political, economic, and business risks specific to a particular country, which can lead to unexpected investment losses. The country risk relates to the risk associated with investing in a particular country, which is due to possible changes in the business environment that could negatively impact profits or asset value in that country.
A country that defaults on its debt obligations impacts all of its stocks, mutual funds, bonds, and other investment instruments, as well as the countries with which it holds financial ties. It is more likely that a country with a severe fiscal deficit is risky than one that has a low deficit, ceteris paribus. Developing nations are considered more risky than developed nations.
The financial crisis of 2008 was a watershed event in global markets, and it has had a profound impact on the way investors think about risk. One of the key drivers of risk is country risk, which refers to the possibility that an individual country’s economy will decline significantly and have a negative effect on the rest of the world.
Investors now view countries as portfolios of assets, and they are much more cautious about investing money in countries that they perceive as risky. This attitude has led to a decreased appetite for high-risk investments in countries around the world, particularly in emerging markets.
However, this cautiousness may not be sustainable over long periods of time. If investors continue to avoid risky countries, then these economies will suffer from less investment and growth. This could ultimately lead to increased social instability and even more economic volatility.
Which of the following characterizes country risk?
A) The political and legal systems of adjacent nations greatly impact the country risk of nations that host foreign firms.
B) Country risk will change only after the creation of laws and regulations that affect foreign firms.
C) A nation’s country risk level remains fairly constant until the election and installation of a newpolitical leader.
D) Country risk is always present, but its intensity fluctuates over time and from country to country